tag:theconversation.com,2011:/us/topics/fiscal-cliff-3865/articlesFiscal cliff – The Conversation2017-09-07T14:43:20Ztag:theconversation.com,2011:article/834622017-09-07T14:43:20Z2017-09-07T14:43:20ZA shift in thinking is needed to counter South Africa's startling rise in poverty<figure><img src="https://images.theconversation.com/files/184681/original/file-20170905-28081-5ofr9j.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=496&amp;fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">REUTERS/Siphiwe Sibeko</span></span></figcaption></figure><p>South Africa urgently needs new policy ideas to reverse the alarming increase in poverty among its population. New <a href="http://www.statssa.gov.za/?p=10334">figures</a> reveal an increase of three million South Africans living in poverty over the last five years. More than half (55%) of the population lives on less than R1,138 (USD$107) a month, up from 53% in 2011. </p>
<p>In a country with 55 million people, 34 million are going without some of the basic necessities, like housing, transport, food, heating and proper clothing. The escalation in hardship and vulnerability reverses the steady progress made since the 1990s.</p>
<p>The poorest have been hit the hardest. One in four citizens survives on less than R531 a month and can’t afford to buy enough food to keep healthy. This proportion has risen from one in five in 2011.</p>
<p>The consequences are plain to see. They include more street begging, homelessness, loan sharks, social discontent, substance misuse and violent crime in many communities. Income is not the only measure of poverty. Progress on education, health and basic living conditions also seems to have <a href="http://www.statssa.gov.za/?p=10334">stalled</a>. </p>
<h2>Progress setback</h2>
<p>The decline in living standards has occurred despite the extension of social grants to two million more recipients in the past five years, bringing the total number of social grant beneficiaries to <a href="https://theconversation.com/why-social-grants-matter-in-south-africa-they-support-33-of-the-nation-73087">17 million</a>. That is nearly one in three people. </p>
<p>Over the previous decade and a half, extending social grants proved to be an effective way of alleviating hardship. Something has changed.</p>
<p>The global economic slowdown and depressed commodity prices have obviously contributed to the problem. These factors have raised <a href="https://www.bloomberg.com/news/articles/2017-06-01/south-africa-jobless-rate-rises-to-14-year-high-in-first-quarter">unemployment</a> to record high levels. Domestic political uncertainties, regulatory conflicts and weaknesses in public administration have also dented business confidence and undermined private sector investment.</p>
<p>New ideas are needed to combat <a href="https://theconversation.com/south-africa-needs-to-fix-its-dangerously-wide-wealth-gap-66355">poverty and inequality</a> in South Africa. A good place to start is the concept of inclusive growth. This is partly about ensuring more people play an active part in economic, social and political processes. It gives people agency and dignity, and helps to hold institutions to account.</p>
<h2>The limits of redistribution</h2>
<p>Since the 1990s, the government’s approach to poverty has focused on fiscal redistribution. Tax rates increase the more people earn, and the revenue raised has been used to support poorer groups. Social assistance has taken the form of free housing, free education, health care, sanitation, electricity and social grants.</p>
<p>Spending on this “social wage” has more than doubled in real terms (taking inflation into account) over the past decade. It now amounts to <a href="http://www.treasury.gov.za/documents/national%20budget/2017/default.aspx">60%</a> of total public spending. South Africa is reputed to have one of the most <a href="https://theconversation.com/south-africa-needs-to-do-more-to-plug-its-deficit-than-target-the-rich-73531">redistributive fiscal policies</a> (tax and spending) in the world. </p>
<p>Yet, with a <a href="https://theconversation.com/south-africa-can-expect-zero-growth-its-problems-are-largely-homemade-62943">sluggish economy</a>, high government debt and new demands for bailouts from state owned enterprises and universities, the <a href="https://theconversation.com/south-africa-needs-to-do-more-to-plug-its-deficit-than-target-the-rich-73531">ability to pay</a> for this welfare system is severely strained. It will be extremely difficult to raise the value of social support or extend it to more people in the period ahead.</p>
<p>Since South Africa progressed from apartheid to democracy in 1994, there has been an understandable focus on distributional matters. These efforts have taken priority over action to promote broad-based growth, integrated development and overall prosperity.</p>
<p>Too little attention has gone into expanding production, employment creation (outside the public sector) and enlarging the resource base. Among households, too, there has been excessive emphasis on spending, rather than saving and investing in education, skills and household assets. As a result, the economy and society are poorly equipped to cope with shocks.</p>
<h2>Inclusive growth</h2>
<p>“<a href="http://www.oecd.org/inclusive-growth/">Inclusive growth</a>” is often touted as a way forward. It’s an umbrella concept to get people with different interests to work together and build a new consensus around a shared agenda for the country’s development. But what does it mean in practice?</p>
<p>A central element is creating new and different kinds of economic opportunities and linking them explicitly to social needs. Major investments in technology, infrastructure and other facilities should lower barriers to inclusion and give more people on low incomes a chance to work or develop skills to progress.</p>
<p>Growth can’t be left to market forces and private enterprise. And social development can’t be left to government alone. A more integrated “whole of society” approach is needed to bridge historical divides. </p>
<p>This means business, labour, civil society and different spheres of government all playing a role in combating poverty by going beyond their conventional responsibilities. Organisations should take positive steps to continually open up opportunities and reduce social inequalities. Firms should actively seek out new markets, new suppliers and new sources of labour.</p>
<h2>Local development</h2>
<p>Recent discussions have been <a href="http://www.sanews.gov.za/business/initiatives-turn-around-sas-economic-fortunes">limited</a> to national stakeholders. Equivalent local initiatives have been few and far between. Yet a strong and prosperous society cannot be engineered from above.</p>
<p>South Africa needs to build competent institutions at local level too. Common platforms for collaboration are required to harness the energies and share the know-how of people in the cities, towns and villages where they live, work and invest. </p>
<p>A place-based approach means tailoring inclusionary economic policies to local realities and opportunities. Local investments in housing, transport, business property and skills will have a greater impact when they are carefully linked and coordinated.</p>
<h2>Support informality</h2>
<p>Current ambivalent attitudes towards informality are not helping anyone. The informal economy could be a nursery for people to learn valuable skills, a stepping stone to formal jobs, and a seedbed for larger, more competitive businesses. </p>
<p>Many unemployed and destitute adults can’t get the grants available to pensioners, children and the disabled. Yet various forms of bureaucratic red tape obstruct their initiatives to start informal enterprises and “create their own jobs”. </p>
<p>Informal settlements are a route for people to escape rural poverty and gain access to urban job markets. Yet they are <a href="http://ismaps.org.za/desktop.html">neglected</a>, hazardous places threatened by government evictions. Affordable urban housing could instead be a driver of inclusive growth and spatial transformation. </p>
<p>In an economic slump, with tight public finances, the government needs new and different ways of responding to local realities. It should orchestrate efforts throughout society which actively support people’s struggles to get ahead, not just enable them get by.</p><img src="https://counter.theconversation.com/content/83462/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ivan Turok does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>South Africa should look towards inclusive growth to push back the growing levels of poverty within the population.Ivan Turok, Executive Director, HSRC, Human Sciences Research CouncilLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/544432016-02-10T15:20:29Z2016-02-10T15:20:29ZDoes President Zuma have the courage to do the right thing?<figure><img src="https://images.theconversation.com/files/110971/original/image-20160210-12137-1xlt9u5.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=496&amp;fit=clip" /><figcaption><span class="caption">South Africa&#39;s Jacob Zuma is president of the country as well as the African National Congress. He is under pressure on all fronts.</span> <span class="attribution"><span class="source">Reuters/Siphiwe Sibeko </span></span></figcaption></figure><p>President Jacob Zuma will have to address two audiences in his 2016 <a href="http://www.gov.za/speeches/state-nation-address-2016-2-feb-2016-1233">State of the Nation Address</a>: the international community and markets on the one hand, and the domestic public on the other.</p>
<p>The fiasco over the firing of Finance Minister <a href="https://theconversation.com/why-zumas-actions-point-to-shambolic-management-of-south-africas-economy-52174">Nhanhla Nene</a> has increased the risks to the South African economy. As a developing economy it is already feeling the impact of declining demand from China, a turbulent Europe and volatile emerging markets. </p>
<p>As things stand, South African fiscal managers suffer from a credibility malaise. The state of the nation address presents an opportunity for confidence building.</p>
<h2>Fiscal discipline</h2>
<p>The international community possibly has a bouquet of expectations in mind. But these cannot be fully satisfied because they are counterbalanced by domestic expectations. </p>
<p>Top of international expectations is a clear commitment to fiscal discipline - specifically a significant reduction of South Africa’s foreign debt which stands at <a href="http://www.saiia.org.za/opinion-analysis/2015-budget-too-little-too-late-for-south-africas-public-debt">44% </a>of GDP. At the same time, reaffirming the <a href="http://www.gov.za/issues/national-development-plan-2030">National Development Plan</a> would be vital to underscoring policy continuity and predictability. This is the governing African National Congress’s plan to eliminate poverty and reduce inequality.</p>
<p>The domestic audience’s endurance has been tested by a plethora of political intrigues. These include waves of <a href="https://theconversation.com/africa/topics/university-fees">student protests</a>, parliamentary party <a href="http://www.news24.com/SouthAfrica/News/Pay-back-the-money-adjourns-Parliament-again-20150618">wrestling</a>, <a href="https://theconversation.com/south-africa-is-on-a-cliff-edge-just-as-it-was-in-1985-53094">economic shocks</a>, the <a href="https://theconversation.com/south-africas-poor-face-rising-food-prices-as-drought-intensifies-52950">drought</a> and serious deficits in <a href="https://theconversation.com/why-zumas-actions-point-to-shambolic-management-of-south-africas-economy-52174">governance</a>. But no economic recovery plan appears to be in the pipeline. On top of this, the 9-point plan outlined in <a href="http://www.gov.za/president-jacob-zuma-state-nation-address-2015">last year’s speech</a> had no discernible impact on the economy.</p>
<p>The state power utility Eskom’s successful management of electricity supply is one of the few tales of success.</p>
<h2>Education</h2>
<p>A paradigm shift is needed to address the problems besetting education. There is a disconnect between the emerging new trends in the South African economy and an educational system based on the old economy. Mining and agriculture used to be the major employers. Today services, the financial sector, manufacturing and transport are bigger players.</p>
<p>Unfortunately, it is unlikely that Zuma will announce a package of structural changes even though education urgently needs a fundamental overhaul. </p>
<p>Tertiary education is over-centralised in universities. But they have insufficient capacity to provide the education and training needed to drive the economy. Diversification is imperative. The country needs additional technical and training colleges for teachers, nurses, agricultural students and artisans.</p>
<p>These should be complemented by advanced institutes for engineering, information communications and technology as well as tourism and hospitality. These institutions need to be established or reinstated where they have been closed down.</p>
<p>The private sector can also make a valuable contribution with its own specialised training. The sectors in which it could play a role include private health care, the automotive sector, aviation and the hotel sector. </p>
<p>Even with the same budget, tertiary education could become more cost-effective and produce more and better graduates with tailor-made skills. </p>
<p>The current Skills Training Education Authorities <a href="http://www.vocational.co.za/">(Setas)</a> system will have to be reconsidered. <a href="https://www.westerncape.gov.za/general-publication/fet-college-information">Further education and training</a> as well as technical, vocational and training colleges must be redesigned into specialised colleges with a much better professional reputation. </p>
<h2>Labour relations</h2>
<p>A third priority change should be in labour relations. Though exceptionally unpopular with the trade unions and the left in general, a fundamental reconsideration of the labour market is needed. </p>
<p>The dilemma is that while the economy continues to grow, albeit <a href="http://www.statssa.gov.za/?page_id=735&amp;id=1">very slowly</a>, it does not produce jobs in low-income categories. Strikes in the public and mining sectors and over-politicisation of trade unions have created a stalemate in employment.</p>
<p>South Africa’s stage of development requires maximum employment as an absolute priority. A trade-off between employment and advanced service conditions is also unavoidable.</p>
<h2>The presidential conundrum</h2>
<p>A number of factors will impede Zuma’s opportunity to have a <a href="http://www.calldon.co.za/lula-moment/">‘Lula moment’</a> - that is, to radically reduce inequality like former Brazilian president Inácio Lula da Silva did.</p>
<p>Zuma has the political persona of a survivor with strong political insticts. But he has had to make three major concessions in just two months. These were:</p>
<ul>
<li><p>agreeing to at least one of the demands of protesting students,</p></li>
<li><p>back-tracking on his appointment of a new <a href="https://theconversation.com/zumas-about-turn-shows-power-of-the-south-african-media-and-the-markets-52315">finance minister</a>,</p></li>
<li><p>and being forced to repay state funds spent on his private residence in <a href="http://www.thepresidency.gov.za/pebble.asp?relid=21539">Nkandla</a>. </p></li>
</ul>
<p>There is a growing perception that his political capital in the ANC is <a href="http://ewn.co.za/2015/12/14/Study-Zuma-losing-popularity-among-South-Africans">diminishing</a>. His leadership authority is in decline: he presides over a party <a href="http://mg.co.za/article/2014-05-11-the-partys-over-anc-sees-decline-in-support">losing support</a>. ANC membership has been in <a href="http://mg.co.za/article/2015-10-09-zuma-blames-anc-kingmakers-for-membership-decline">decline </a> since 2012 and the party is paralysed by factionalism, particularly in provinces such as Kwa-Zulu Natal. The governing party’s relationship with its <a href="http://www.anc.org.za/kids/main.php?id=14">alliance partners</a> has reached a <a href="http://www.bdlive.co.za/business/financial/2016/01/14/cosatu-threatens-anc-on-elections">very low point</a>.</p>
<p>The forthcoming <a href="http://www.elections.org.za/content/Elections/2016-Municipal-Elections/Home/">municipal elections</a> will have a dampening effect on political decision-making. Any party prefers a relatively conservative and predictable strategy during election periods.</p>
<p>The need to keep the Congress of South African Trade Unions as an election partner will also put paid to the possibility of radical changes in the labour dispensation. The ANC is already embroiled in a bitter standoff with the union federation over <a href="http://ewn.co.za/2016/02/04/Cosatu-planning-big-strike-over-new-pension-laws">changes to pension laws</a>.</p>
<p>The final complicating factor is that international pressure has to be balanced against expectations of a domestic economic stimulus. Sentiments in the ANC are critical of international pressure and will insist on self-reliance. Zuma will therefore have to find a compromise between these.</p><img src="https://counter.theconversation.com/content/54443/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dirk Kotze does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>It is unlikely President Zuma will announce a structural changes in his State of the Nation Address. This, despite education being in dire need of fundamental restructuring and an economy in decline.Dirk Kotze, Professor in Political Science, University of South AfricaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/544122016-02-09T13:40:34Z2016-02-09T13:40:34ZState of the Nation address: what Zuma needs to tell South Africa<figure><img src="https://images.theconversation.com/files/110786/original/image-20160209-12616-1vp3beb.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=496&amp;fit=clip" /><figcaption><span class="caption">Much is expected of South African President Jacob Zuma when he delivers his 2016 State of the Nation Address.</span> <span class="attribution"><span class="source">Reuters/Sumaya Hisham</span></span></figcaption></figure><p><em>South Africa’s President Jacob Zuma will give his 2016 State of the Nation Address on February 11 to outline key government business for the year ahead. The event will be keenly watched to establish what the president and the governing African National Congress consider to be the most important challenges facing the country, and how they plan to tackle them. Politics and society editor Thabo Leshilo asked three political scientists what to expect.</em></p>
<p><strong>What are the most important issues the president should be addressing?</strong></p>
<p><em>Andre Duvenhage</em>: The four most important issues are the economy and economic growth, social cohesion, land reform and preparing the terrain for the 2016 local government elections.</p>
<p>Economic growth is necessary to prevent international rating agencies downgrading South Africa’s sovereign rating to <a href="http://www.fin24.com/Economy/sa-heading-for-junk-status-unless-gdp-grows-20151208">junk status</a>, to create jobs and to attain all the government’s big strategic goals. </p>
<p>Social cohesion is directly related to the debate about <a href="http://www.timeslive.co.za/thetimes/2016/01/11/Number-of-complaints-to-HRC-suggest-South-Africa-is-becoming-more-racist">racism</a>. It also seems to be an important part of the ANC’s election campaign. It is critical for the ANC to perform well in the upcoming <a href="http://mg.co.za/article/2014-05-11-the-partys-over-anc-sees-decline-in-support">municipal election</a>. More radical social and economic transformation, with emphasis on <a href="http://www.biznews.com/undictated/2015/02/24/brilliant-analysis-zimbabwean-ruin-looms-large-as-sa-land-reform-kicks-into-gear/">land reform</a>, will be most critical.</p>
<p><em>Leon Schreiber</em>: There is no doubt that the general loss of faith in the economy is the most important issue Zuma must address. While global economic conditions are indeed unfavourable, they are no excuse for the sickly state of the South African economy.</p>
<p>A number of developments point to the government’s general mismanagement of the economy, as well as some own goals. These include: the firing of his finance minister, now known as <a href="https://theconversation.com/why-zumas-actions-point-to-shambolic-management-of-south-africas-economy-52174">#Nenegate</a>, the plummeting rand, rising food prices due to government’s failure to come to the aid of drought-stricken farmers, policy flux and soaring government debt.</p>
<p>All have put the country firmly on the path to recession and there is a strong possibility that South Africa’s sovereign rating will be downgraded to junk status. He needs to acknowledge these problems and announce concrete steps to begin to fix the ailing economy.</p>
<p>Related to this is the fact that government’s wage bill simply has to be trimmed. <a href="https://theconversation.com/civil-service-pay-south-africa-has-some-harsh-choices-to-make-53389">Civil servants’</a> salaries and benefits consume 35.5% of government’s total budget. This contributed to <a href="http://www.saiia.org.za/opinion-analysis/2015-budget-too-little-too-late-for-south-africas-public-debt">public debt ballooning</a> by 70% between 2009 and 2014 – from 26% of GDP to 44% by 2014. </p>
<p>The return on this investment has been almost non-existent as the civil service remains <a href="http://www.unisa.ac.za/news/index.php/2014/01/sa-labour-productivity-at-its-lowest-in-46-years/">unproductive</a> and service delivery <a href="https://theconversation.com/protests-soar-amid-unmet-expectations-in-south-africa-42013">protests</a> remain a fact of daily life. </p>
<p>And instead of reining in this expenditure, the public service was awarded a <a href="http://www.treasury.gov.za/documents/national%20budget/2015/ene/FullENE.pdf">10.1% salary increase</a> for 2015/2016, while an additional 300 000 civil servants were employed between 2008 and 2015, bringing the total to 1.6 million. </p>
<p>President Zuma must use the speech to signal his willingness to cut this inefficient spending.</p>
<p>It is also time he started to show leadership on the <a href="https://theconversation.com/africa/topics/university-fees">#FeesMustFall</a> matter. The speech provides him with a good opportunity to demonstrate to the country that he has listened to students’ concerns about unaffordable education, and that his administration is committed to finding sustainable solutions. Continuing the current dismissive approach to the issue would add further fuel to the protest fire.</p>
<p><em>Bheki Mngomezulu</em>: The state of the <a href="https://theconversation.com/south-africa-is-on-a-cliff-edge-just-as-it-was-in-1985-53094">country’s economy</a> has to be the top priority. While economic development is not a panacea for all the problems a country faces, South Africa cannot prosper under the current weak economic conditions. </p>
<p>The reasons for the current crisis, as well as possible solutions, will have to be addressed. This would have two positive effects. First, it would revive hope that the government has plans in place to remedy the situation. Secondly, it would give potential investors confidence. This would dispel the wrong perception that the president does not care about the country’s economy and that he makes reckless decisions.</p>
<p>The president also needs to address the situation at higher education institutions. The call for free education by students and their dissatisfaction with the way in which government has responded to their demands should feature significantly. This is important because, to meet the demand, either the country’s budget needs to be adjusted or taxes must be increased. Either way South Africans would have to dig deeper into their pockets. </p>
<p>And the president needs to address violence both within and between political parties. This is of serious concern. The issue is particularly important because of the forthcoming local elections. Unless political violence is curtailed now it will be difficult to contain - let alone end - around election time.</p>
<p><strong>Does the President have what it takes to deliver on these challenges?</strong></p>
<p><em>Andre Duvenhage</em>: President Zuma is playing the survival game and is not going to take bold decisions. Survival is about the succession battle within the ANC. He will make a lot of tactical moves but won’t take big strategic decisions to take the country forward during a time of crisis.</p>
<p><em>Leon Schreiber</em>: Unfortunately, it is very unlikely that Zuma will take bold action. He has generally proven to be a weak and compromised leader, preferring to avoid tough decisions as much as possible. Concrete actions on the economy and a commitment to cutting the wasteful civil service budget would be politically unpopular with the ANC and its alliance partners, while the pressures of the upcoming local government elections make it extremely unlikely that the president will take these necessary steps. Instead, South Africans can expect more of the same from Zuma: a poorly-delivered and uninspiring speech filled with selective anecdotes touting government’s supposed successes while denying the scale of the socio-economic crisis facing the country. </p>
<p><em>Bheki Mngomezulu</em>: The President will in all likelihood be very cautious. And with the local elections around the corner, the President would not want to give opposition political parties ammunition to ambush the ruling party. </p>
<p>While it is true that Zuma has over the years proved he has the ability to weather the storms, and laugh things off, this time around there is a lot at stake. Previous developments and an anticipation of things to come in the local election and the ANC elective conference in 2017 will influence how he articulates certain government positions. </p>
<p>Taking a bold decision calls for courage. It is also contingent on a confluence of factors. For example, he has to be certain that he has enough support so that even if a decision is challenged there would be people to support it. At the moment he has no such guarantee.</p><img src="https://counter.theconversation.com/content/54412/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Leon Schreiber is a volunteer for the DA Abroad.</span></em></p><p class="fine-print"><em><span>Andre Duvenhage and Bheki Mngomezulu do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The general loss of faith in the economy is the most important issue President Zuma must address. More radical social and economic transformation, with emphasis on land reform will be most critical.Andre Duvenhage, Research Director, North-West UniversityBheki Mngomezulu, Senior Lecturer and Academic Leader, International & Public Affairs, University of KwaZulu-NatalLeon Schreiber, Research Specialist, Innovations for Successful Societies, Princeton UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/533892016-01-29T04:05:59Z2016-01-29T04:05:59ZCivil service pay: South Africa has some harsh choices to make<figure><img src="https://images.theconversation.com/files/109467/original/image-20160128-1030-1a2zcwn.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=496&amp;fit=clip" /><figcaption><span class="caption">Thousands of civil service employees gather during a protest march for higher pay at the Union Buildings in Pretoria in 2010.</span> <span class="attribution"><span class="source">EPA/Jon Hrusa</span></span></figcaption></figure><p>South Africa faces a looming fiscal cliff owing to growth in social grant expenditure and civil service remuneration, combined with a slowdown in the growth of the economy. A fiscal cliff is when a country’s finances reach a potential crisis point where it can no longer sustain its existing expenditure levels.</p>
<p>The Irish Republic is an example of a country that faced a fiscal cliff of this nature. Following on the international financial crisis of 2007/08, the country’s gross domestic product (GDP) declined by 7.7% up to 2010, with a concomitant decline in government revenue.</p>
<p>Ireland had to face harsh fiscal choices. The government used a combination of tax increases amounting to some €11bn and expenditure cuts amounting to some €19bn to restore the fiscal balance.</p>
<p>Civil service remuneration was one expenditure item subjected to a substantial cut. At senior level the reduction in remuneration amounted to 28%, while the average reduction in remuneration amounted to 19%. This happened at a time when the Irish rate of inflation was about 0.5% per annum.</p>
<p>The harsh choices made by the Irish government show the consequences once a country has reached the precipice of a fiscal cliff.</p>
<h2>What South Africa did when the going was good</h2>
<p>South Africa was also a beneficiary of rapid economic growth in the period running up to the financial crisis of 2007/08. The South African government also used expansionary fiscal policy - increases in government expenditure - funded by tax increases and increased borrowing in response to the financial crisis. These attempts to sustain economic growth were unsuccessful, with South Africa suffering a recession in 2009.</p>
<p>But the South African response differed considerably in respect of the civil service. Civil service employment has continued to grow since 2008 - from 1.3 million to nearly 1.6 million in 2015 - as was the case with civil service remuneration.</p>
<p>This growth in employment did not result in increased productivity. There was no marked improvement in output per worker. This would have resulted, for example, in improved service delivery. <a href="http://www.thensg.gov.za/MediaLib/Downloads/Downloads/17thPublicSectorTrainersForumPSTFConference/Ms%20Lelane%20Janse%20Van%20Rensburg%20-%20Puplic%20Sector%20Productivity%201-15.pdf">ProductivitySA</a> reports that improving productivity is a challenge facing the South African civil service.</p>
<p>In the 2015/16-fiscal year the public sector remuneration agreement resulted in a <a href="http://www.treasury.gov.za/documents/national%20budget/2015/ene/FullENE.pdf">10.1% increase</a> in the remuneration and benefits of government employees. Over the remainder of the period of the agreement the rate of increase in civil service remuneration will be above 8% per annum, while inflation will be around 5% per annum.</p>
<p>Civil servants will therefore get substantial real remuneration increases.</p>
<h2>Burden on the fiscus</h2>
<p>As a percentage of the government’s tax revenue, civil service remuneration will increase from 33.3% in the 2007/08-fiscal year to 45.4% in the 2018/19-fiscal year. Civil service remuneration amounts to nearly 12% of the South African GDP. This is a substantially higher percentage than in other <a href="https://www.imf.org/external/pubs/ft/scr/2014/cr14338.pdf">developing countries</a>.</p>
<p>The government faces a broad spectrum of spending priorities other than paying the remuneration of civil servants. This includes items such as capital expenditure (investing in the future of the country), which amounts to some 7% of total expenditure, and interest on government debt, amounting to some 9,4% of expenditure. </p>
<p>This places a considerable burden on government finances and therefore on the South African tax payer. The government raises income mainly by means of taxes. The most important of these are income tax on individual tax payers, company tax on the profits of companies and value-added tax. Additional income sources include items such as fuel taxes, customs duties and excise duties.</p>
<p>This leaves no doubt that the South African government faces tough choices. The Irish Republic faced these choices some years ago. More recently Tanzania has had to consider them too.</p>
<p>Since his inauguration on 5 November 2015, Tanzanian President John Magufuli has made tough choices in the implementation of austerity steps. A case in point is a <a href="http://www.reuters.com/article/us-tanzania-christmas-idUSKBN0TF1W620151126">decision to redirect</a> TZS200 billion (some US$100 000) previously budgeted for a party after the opening of Parliament to the buying of hospital beds.</p>
<p>Other examples of austerity measures in Tanzania are the scrapping of government Christmas cards and a reconsideration of the number of officials who can fly first and business class.</p>
<p>The Irish and Tanzanian examples show that the South African government has not really seriously considered austerity measures in containing government expenditure. It still has a long way to go.</p>
<p>At more than 45% of government revenue, it is clear that the civil service remuneration bill is the most serious challenge facing government finances. Growth since 2008 has brought civil service remuneration expenditure to an unsustainable level.</p>
<h2>Multidimensional approach needed</h2>
<p>First, the government should urgently announce a moratorium on civil service employment growth. Simply put: no additional appointments until the end of the current unaffordable remuneration adjustment cycle. South Africa has reached its upper limit in the number of civil servants that can be sustained.</p>
<p>Secondly, the government as employer should explain to trade unions that the current three-year remuneration adjustment settlement is the last of these generous general adjustments. Owing to affordability constraints, this generosity cannot be repeated. When the current agreement lapses, it will be necessary to freeze civil service remuneration in nominal terms, which means real reductions after inflation. The alternative may ultimately be remuneration reductions as was the case in the Irish Republic.</p>
<p>No general adjustments still imply some increase in civil service remuneration. The remuneration bill will still increase owing to notch increases (some 1% per annum) and promotions (some 1% to 1.5% per annum).</p>
<p>This would be the ideal scenario because the civil service salary bill would then fall as a percentage of tax collections, and as a percentage of GDP. But the achievement of this outcome requires some very hard choices.</p><img src="https://counter.theconversation.com/content/53389/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jannie Rossouw tidak bekerja, menjadi konsultan, memiliki saham, atau menerima dana dari perusahaan atau organisasi mana pun yang akan mengambil untung dari artikel ini, dan telah mengungkapkan bahwa ia tidak memiliki afiliasi di luar afiliasi akademis yang telah disebut di atas.</span></em></p>South Africa's government should urgently announce a moratorium on civil service employment growth. The country has reached its upper limit in the number of civil servants that can be sustained.Jannie Rossouw, Head of School of Economic & Business Sciences, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/124582013-02-27T19:49:24Z2013-02-27T19:49:24ZNo silver lining to US budget sequester<figure><img src="https://images.theconversation.com/files/20708/original/h2xf7d8t-1361935108.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=496&amp;fit=clip" /><figcaption><span class="caption">The deadline for the US budget sequester —which will see across-the-board spending cuts of $US 85 billion implemented over the fiscal year — is rapidly approaching.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>The first thing you should know about the sequester is that nearly everyone agrees that it’s a bad idea. In fact, that was the point.</p>
<p>In the summer of 2011, with congressional Republicans refusing to raise the debt ceiling, the White House proposed an alternative to try and avoid a budget default. In exchange for increasing the country’s borrowing limit, the two sides lined up <a href="http://en.wikipedia.org/wiki/Budget_Control_Act_of_2011">$1.2 trillion in across the board cuts</a>, which were to go into effect at the beginning of 2013 unless Congress and the President could agree on a way to achieve equivalent savings. This sequestration would be spread out over the next decade with roughly $85 billion in cuts set to kick in during the first fiscal year.</p>
<p>The sequester is haphazard, to say the least. The cuts are evenly divided between defence and non-defence discretionary spending and apply equally to all federal agencies. This means there’s no way to prioritise more crucial programs or projects. The thinking was that because the cuts were so crude and far-reaching, there’d be real incentive for Democrats and Republicans to replace the sequester with something more palatable.</p>
<p>But that’s not how things have played out. First, there was a bipartisan supercommittee tasked with reaching a deal. That fell apart. Then the two sides agreed to delay the sequester until March 1 as part of the January fiscal cliff deal. And now we’re on the verge of blowing past that new deadline with no endpoint in sight.</p>
<p>President Obama and congressional Democrats want to replace the sequester with a combination of spending cuts and revenue increases.</p>
<p>Here’s a rough outline of the <a href="http://www.whitehouse.gov/sites/default/files/docs/deficit_reduction_table_bucketed_r8.pdf">White House’s proposal</a>: $580 billion dollars in savings by limiting deductions for high income earners; $400 billion in healthcare savings through cuts to Medicare provider payments; $200 billion dollars split between defence and non-defence discretionary spending; and $130 billion in Social Security cost-of-living adjustments (ie benefit cuts).</p>
<p>Republican leaders haven’t put forward a formal counter-proposal, but they have been clear on one point: no tax hikes. “Mr President, you got your tax increase [back in January]” House Speaker John Boehner <a href="http://firstread.nbcnews.com/_news/2013/02/25/17090408-you-got-your-tax-increase-boehner-tells-obama-as-sequester-staring-contest-continues?lite">declared</a> on Monday. “Now it’s time to cut spending.”</p>
<p>Sensing an impasse, the White House has tried ratchet up to the pressure by <a href="http://www.upi.com/blog/2013/02/25/White-House-releases-state-by-state-reports-on-sequester-impact/4541361822707/">releasing detailed state-by-state reports</a> on the effects of the sequester. The findings aren’t pleasant. Roughly 70,000 kids <a href="http://money.cnn.com/2013/02/19/news/economy/headstart-cuts/index.html">could get kicked off Head Start</a>, the early childhood education program for low-income families. Six hundred thousand women and children <a href="http://www.economist.com/blogs/democracyinamerica/2013/02/sequester-showdown?fsrc=scn/tw/te/bl/whentemporisingfails">would no longer be eligible for nutrition support</a>. Flights delays could <a href="http://www.nytimes.com/2013/02/23/us/politics/democrats-press-gop-to-start-talks-to-avert-budget-cuts.html?_r=0">increase dramatically</a> and smaller airports’ towers closed altogether.</p>
<p>What’s especially frustrating is that this self-inflicted pain serves little purpose. The trillion-dollar deficits of recent years have been driven primarily by one-off events stemming from the global financial crisis. In fact, discretionary spending is at its lowest level relative to GDP in over 50 years after President Obama and Congress agreed to $900 billion in cuts in 2011.</p>
<p>The sequester failed to touch the real catalyst of the country’s long-term debt: problem-entitlement spending. Rising healthcare costs and an ageing population are causing outlays for Medicare, Medicaid and Social Security to outpace their sources of revenue. The US is already bearing some of the consequences of these changes but the most <a href="http://www.theatlantic.com/business/archive/2013/01/how-to-worry-about-the-deficit-1-dont-2-wait-a-few-years-3-then-worry-about-healthcare-costs/272521/">dramatic problems won’t arise until the 2020s and 30s</a>.</p>
<p>Addressing these challenges will require hard decisions on spending and taxes, but it also hinges on creating sustained and robust economic growth. The recent test cases from Europe confirmed what most economists could have predicted: austerity during an economic downturn is a recipe for disaster. Sure enough, <a href="http://bipartisanpolicy.org/blog/2013/02/sequester-need-to-know">estimates</a> by the Office of Management and Budget and the Bipartisan Policy Center predict that the sequester would cost between 700,000 and 1,000,000 jobs by the end of 2014.</p>
<p>Further, discretionary spending on education, infrastructure, and research and development <a href="http://www.amazon.com/Heres-Deal-Kindle-Single-ebook/dp/B00BCQ2Y7S">end up paying large dividends down the road</a>. Just as it makes economic sense for a teenager to take out loans for university, so too can it be wise for the government to invest in programs that will increase the well-being and earning potential of its citizenry.</p>
<p>Certainly, some discretionary spending is wasteful and should be done away with. And the sequester’s defence cuts - albeit poorly designed - are long overdue. But the deficit reduction set to go into effect on March 1 fails to address most of the major budgetary issues while further squeezing some already underfunded programs and hampering the economic recovery.</p>
<p>The problem is that while the sequester is bad, it ironically doesn’t seem to have been bad enough to serve its purpose of forcing a deal. As such, the next in the seemingly endless series of deadlines to keep an eye on is March 27. This is the point by which Congress needs to pass a <a href="http://en.wikipedia.org/wiki/Continuing_resolution">continuing resolution</a> to fund the government through the next fiscal year. Both sides could try to use this as leverage with Republicans holding out for more cuts and Democrats demanding a more balanced replacement for the sequester. We’ll have to see if the threat of a government shutdown actually spurs some action.</p><img src="https://counter.theconversation.com/content/12458/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Luke Freedman does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The first thing you should know about the sequester is that nearly everyone agrees that it’s a bad idea. In fact, that was the point. In the summer of 2011, with congressional Republicans refusing to raise…Luke Freedman, US Election Analyst, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/122052013-02-13T19:24:49Z2013-02-13T19:24:49ZObama extends a light hand of liberalism to Americans<figure><img src="https://images.theconversation.com/files/20236/original/g6r7ttnx-1360746579.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=496&amp;fit=clip" /><figcaption><span class="caption">By opting for restraint in his state of the union speech, Obama presented his ideas not as bold initiatives to revive the liberal tradition, but as pragmatic proposals with widespread bipartisan support.</span> <span class="attribution"><span class="source">EPA</span></span></figcaption></figure><p>Barack Obama opened his <a href="http://www.nytimes.com/2013/02/13/us/politics/obamas-2013-state-of-the-union-address.html?_r=0&amp;pagewanted=all">fourth state of the union address</a> to Congress with words from another Democratic president, John Kennedy: “The Constitution makes us not rivals for power but partners for progress.”</p>
<p>Partners, not rivals. A little of the old, reach-across-the-aisle Obama was peeking through. But second-term Obama is not the naïf first-term Obama was. He was not beseeching Congress to meet him halfway, to find consensus and compromise. He was not, in fact, talking to Congress at all. He was talking about Congress to the American people.</p>
<p>In his inaugural address a few weeks ago, Obama offered <a href="http://dyn.politico.com/printstory.cfm?uuid=ACC18557-0EC8-9ABE-C843D58BF812DCEF">an impassioned defense</a> of modern liberalism. He rooted his vision for the future in the nation’s past, from the ideals of the founding to the civil rights struggles of the twentieth century. When he spoke of fairness, he waxed lyrical. When he spoke of his opponents, he got downright pugnacious. “We cannot mistake absolutism for principle,” he insisted in a clear reference to congressional Republicans, “or substitute spectacle for politics, or treat name-calling as reasoned debate.”</p>
<p>Many expected the state of the union to build on that combativeness. Instead, Obama emphasised how very reasonable his goals were. He presented his ideas not as bold initiatives to revive the liberal tradition, but as pragmatic proposals with widespread bipartisan support:</p>
<p>Sequestration: Obama decried the “sudden, harsh, arbitrary” cuts to the military and social programs set to go into effect this year, citing “Democrats, Republicans, business leaders, and economists” who agreed sequestration would endanger both the recovery and national security. He offered instead “modest reforms” and a “balanced approach.” Given that, as Obama pointed out, the $2.5 trillion in deficit reduction already passed is<a href="http://www.washingtonpost.com/blogs/plum-line/wp/2013/02/06/the-absurdity-of-the-gop-position-on-spending-in-one-chart/">comprised mostly of spending cuts</a>, balance would no doubt be achieved with fewer cuts and greater revenue (i.e., taxes).</p>
<p>Climate policy: In both the inaugural and the state of the union, climate change was front and centre – a surprise, given how little the president mentioned it during the campaign. Last night (US time) Obama made a thinly-veiled call for cap-and-trade (a “market-based solution”). Yet he also insisted support for the policy was not limited to Democrats, pointing out Republican senator John McCain and Independent senator Joe Lieberman had worked on <a href="http://www.c2es.org/policy_center/analyses/s_139_summary.cfm">a similar bill</a> a few years earlier. The camera lingered on a clearly uncomfortable McCain, who dumped his support for climate policy when he ran for president in 2008.</p>
<p>Voting reform: Desiline Victor, one of the “ordinary Americans” that have become a mainstay of state of the union addresses in recent years, <a href="http://www.washingtonpost.com/politics/state-of-the-union-guest-desiline-victor-102-will-be-the-face-of-voting-delays-at-address/2013/02/11/3b81604a-74a4-11e2-95e4-6148e45d7adb_story.html">waited hours</a> to vote in Florida last November. The 102-year-old received a lengthy round of applause when she was introduced, the unreasonableness of her experience requiring little explanation. Yet here too the president emphasised broad bipartisan support. The new voting commission will be headed by two attorneys: one worked on Obama’s 2012 campaign, the other on Romney’s.</p>
<p>Gun control: The high point of the speech came when Obama spoke about guns. Two months after the massacre at Newtown, emotions ran high in the chamber. Deafening applause was punctuated by frenzied shouts. Yet while Obama grew more expressive and his language more rhythmic, his speech maintained its emphasis on reasonableness. He spoke not of sweeping changes or fundamental re-evaluations of America’s gun laws, but of “overwhelming majorities” supporting “commonsense reforms.” Even his refrain was measured: victims of gun violence from former representative Gabby Giffords to the families of Newtown “deserve a vote.” One could argue they deserve much more than that, but a simple vote was all Obama asked.</p>
<p>Why such a restrained approach? Because Obama wanted Americans watching to ask themselves: Who could possibly be against that? It is a question invariably answered with “the Republicans in Congress.” Who opposes a compromise on sequestration? The Republicans. Who opposes John McCain’s sensible cap-and-trade plan? The Republicans – including John McCain. And who opposes a vote on gun control legislation, threatening to filibuster any bills that come to the Senate? You guessed it: the Republicans.</p>
<p>Though he used a lighter hand, Obama’s message in the state of the union was the same as in his inaugural: the main obstacle to meeting the challenges of the day is not a lack of will or a dearth of ideas, but Republican intransigence. The president vowed to work around them when possible. “If Congress won’t act soon to protect future generations,” he said in his comments on climate change, “I will.”</p>
<p>But issues like the economy and immigration can’t be fixed with executive orders. They require Congress to legislate, a duty Republican members abdicated some time ago. Obama’s one hope for his second-term agenda is that the public will force Congress to transform from “rivals for power” into “partners for progress”. A long shot, to be sure, but his speech last night showed Obama believes it’s the best chance he has.</p><img src="https://counter.theconversation.com/content/12205/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Nicole Hemmer does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Barack Obama opened his fourth state of the union address to Congress with words from another Democratic president, John Kennedy: “The Constitution makes us not rivals for power but partners for progress…Nicole Hemmer, Visiting Assistant Professor at University of Miami & Research Associate, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/115322013-01-11T03:20:55Z2013-01-11T03:20:55ZThe trillion-dollar coin: change Americans can believe in<figure><img src="https://images.theconversation.com/files/19100/original/rphb4nfd-1357779307.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=496&amp;fit=clip" /><figcaption><span class="caption">It may seem like an idea with currency, but miinting a trillion dollar coin to sidestep the debt ceiling is a fabricated solution to a fabricated crisis.</span> <span class="attribution"><span class="source">Wikimedia Commons</span></span></figcaption></figure><p>In the midst of genuine economic and political challenges, Tea Party Republicans have been hard at work generating additional problems. From the debt-ceiling showdown that <a href="http://articles.washingtonpost.com/2011-08-05/business/35417342_1_downgrade-aaa-credit-ratings-government-debt">cost</a> the US its AAA credit rating to the fiscal cliff negotiations that led to layoffs and budget cuts despite a last-minute resolution, these artificial crises have had real consequences.</p>
<p>No sooner had the fiscal cliff been averted than Republicans <a href="http://www.nationaljournal.com/politics/republicans-in-fighting-mood-over-debt-ceiling-20130108">vowed</a> to force another fight over the impending debt-ceiling authorisation. In response, economist Paul Krugman floated a <a href="http://krugman.blogs.nytimes.com/2013/01/07/be-ready-to-mint-that-coin/">novel resolution</a>: President Obama should order Treasury to mint a trillion-dollar coin, buying the US another year’s worth of credit and sidestepping the whole mess.</p>
<p>A gimmick? Of course. But symbolically, it’s the perfect response: a fabricated solution for a fabricated crisis.</p>
<p>Here’s the deal with the debt ceiling: The United States is <a href="http://abcnews.go.com/blogs/politics/2011/07/only-one-democratic-country-besides-america-has-a-debt-ceiling/">one of only two</a> democratic countries to have one. (The other country, Denmark, set its so astronomically high that they’ll likely never reach it.) The debt ceiling caps the borrowing authority of the US government. Congress, having already voted to spend the money, has to separately authorise the borrowing necessary to pay it back, or else default on the nation’s debt.</p>
<p>Given the choice between the inevitable (raising the limit) and the unacceptable (going into default), Congress has traditionally treated the debt-ceiling vote as a formality, with <a href="http://www.politifact.com/truth-o-meter/article/2011/apr/29/new-politics-debt-ceiling-vote/">dissenters</a> never mustering enough votes for their opposition to be more than symbolic.</p>
<p>Then Barack Obama won the 2008 election and Republicans suddenly lost their appetite for large deficits. Once Republicans won control of the House in 2010, they had the power to turn the debt-ceiling vote into a hostage negotiation: give us massive spending cuts or we drive the nation into default.</p>
<p>While Republican leaders in the House <a href="http://www.guardian.co.uk/commentisfree/cifamerica/2011/jul/29/john-boehner-republicans">showed little appetite</a> for this sort of Thelma-and-Louise politics, the new Tea Party caucus made it their signature manoeuvre. The debt-ceiling crisis resolved with the construction of the fiscal cliff. The fiscal cliff was averted <a href="http://www.bloomberg.com/news/2012-12-31/geithner-tells-congress-u-s-reaches-debt-limit.html">the day</a> the US reached the debt-ceiling again. So it will continue, ad infinitum and ad absurdum, until Tea Party Republicans lose influence within the GOP. The question is how badly they will damage their party and the U.S. economy in the process.</p>
<p>Compare all this to the 1990s, when House Republicans and President Clinton reached an impasse over spending cuts and tax rates. Their inability to find common ground led to a real crisis: the federal government shut down for over a month. But when the two sides returned to the bargaining table, they reached a compromise that resulted in the first budget surpluses in decades.</p>
<p>In sharp contrast, the fiscal cliff and debt-ceiling votes have yielded no lasting fiscal solutions. They are instead wholly avoidable and unnecessarily damaging crises. They inject uncertainty and risk into an economy that needs far less of both.</p>
<p>This is not to argue, as Vice-President Dick Cheney <a href="http://www.businessweek.com/stories/2004-12-26/what-killed-off-the-gop-deficit-hawks">once did</a>, that “deficits don’t matter”. In the long-term, America’s growing debt spells economic catastrophe. In the short-term, however, on the heels of an economic collapse and sluggish recovery, deficits are far from the primary fiscal concern. Indeed, given the fragile economy, switching to austerity measures to control spending would only deepen the country’s economic woes.</p>
<p>Because Tea Party Republicans lack the political power and public support to advance their agenda, they have resorted to artificial crises and obstructionism to get their way. Which makes an artificial solution like Krugman’s trillion-dollar coin a perfect match. Sure, the coin won’t solve any of the actual problems facing America. But it would help put an end to the fake ones, giving Americans a chance at a working political system at a moment they desperately need one.</p><img src="https://counter.theconversation.com/content/11532/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Nicole Hemmer does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>In the midst of genuine economic and political challenges, Tea Party Republicans have been hard at work generating additional problems. From the debt-ceiling showdown that cost the US its AAA credit rating…Nicole Hemmer, Visiting Assistant Professor at University of Miami & Research Associate, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/108862012-12-21T00:33:56Z2012-12-21T00:33:56ZIs it time for Australia to tackle its Warren Buffett-style tax anomalies?<figure><img src="https://images.theconversation.com/files/18940/original/7wc7y4bf-1355960704.jpg?ixlib=rb-1.1.0&amp;rect=33%2C52%2C2440%2C1886&amp;q=45&amp;auto=format&amp;w=496&amp;fit=clip" /><figcaption><span class="caption">Billionaire US investor Warren Buffett pays less tax than his secretary - but Australia has its own anomalies.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>In his 2012 State of the Union address US President Barack Obama lamented the fact that billionaire Warren Buffett <a href="http://www.whitehouse.gov/economy/buffett-rule">faces a lower tax rate</a> on his income than his secretary. </p>
<p>The situation arises because the secretary’s salary income will be taxed at the normal US tax scales. On an income above US$34,500 but below US$83,600, Buffett’s secretary would face a 25% tax rate. But the dividends and capital gains the billionaire investor makes on his directly held investments are likely to be taxed at a maximum rate of 15%.</p>
<p><a href="http://edition.cnn.com/2012/12/19/politics/fiscal-cliff/index.html">Political deliberations</a> to tackle the fiscal cliff in the US are focusing heavily on the tax system that gives rise to these types of anomalies. </p>
<p>But Australia’s income tax system has its own Warren Buffett-type anomalies. Indeed, there is considerable momentum to add more of them, albeit that it is presently halted in light of the fiscal position. For example, consider the government’s announced policy of giving a 50% discount (tax break) on interest income up to a certain level, and the <a href="http://www.smh.com.au/business/federal-budget/interest-tax-break-on-savings-scrapped-20120508-1ybdw.html">subsequent withdrawal</a> of this proposal.</p>
<p>One of the most contentious anomalies was introduced in 1999 by the Howard government; <a href="http://www.ato.gov.au/individuals/content.aspx?doc=/content/36552.htm">discount capital gains</a> for individuals. This essentially means a person only gets taxed on half of the capital gain they make (e.g. only $5,000 of a $10,000 gain would be taxed). </p>
<p>The effect is that a person on the top marginal rate of tax over $180,000 of income) would only pay a rate of 23.25% on a capital gain (50% of the top marginal rate of tax of 46.5%). A person on the tax rate one down from the top marginal rate (income above $80,000 but below $180,000) would only pay a rate of 19.25% on a capital gain (50% of the 38.5% marginal rate band).</p>
<p>Where is the anomaly caused by discount capital gains? A wage earner on income above $37,000 will face a tax rate of 34% on income above that amount. When the income reaches $80,000, every extra dollar is taxed at 38.5%. Yet, the most that is payable on a discount capital gain is 23.25%.</p>
<p>Why do we have such anomalies or differential treatment in the tax law? After all, isn’t a buck a buck, and therefore they should all be taxed in a similar way? Yes, a buck is a buck in terms of economic well being, and for accounting purposes, but for tax purposes, not every buck is quite the same. </p>
<p>Why? In short, governments seem to believe - with considerable help from official enquiries, the latest being the <a href="http://www.taxreview.treasury.gov.au/content/Content.aspx?doc=html/pubs_reports.htm">Henry Tax Review</a> - that different taxes have different behaviour effects on taxpayers, and tax measures that have a damaging effect on investment and economic growth should be avoided.</p>
<p>Because of this, the general suggestion from the Henry Review is that higher taxes should be imposed on factors of production or activities that are not movable, or activities that are not susceptible to change or relocation. </p>
<p>Higher taxes on these factors or activities are regarded as efficient taxes as their imposition does not change taxpayer behaviour. </p>
<p>On the other hand, lower taxes should be imposed on those factors of production or activities that are mobile or for which there are substitutes. High taxation here is regarded as inefficient as it is likely to change the behaviour of the taxpayer to the overall economic detriment.</p>
<p>Applying these guiding principles, the state and territory land taxes should be increased and they should be extended to the main residence and land used for primary production. (Note, there are local government rates on the family home and primary production land already). </p>
<p>A well-designed death duty regime ought to be introduced because such a tax should not result in significant changes to taxpayer behaviour. There is little need to lower taxes on income from salary and wages as workers have no real alternative but to work. </p>
<p>There is some discussion though about lowering the tax rate faced by some workers to increase workforce participation (e.g. older Australians, second earners in a household) as these workers may have a viable alternative to working.</p>
<p>Money capital (and assets readily converted into money) is perceived to be the most mobile of all resources. The thinking is, if Australia overtaxes the return on money capital, the capital will simply move somewhere else where the tax rate is lower. This is the reasoning behind the push to lower taxes on money capital. Further, state and territory stamp duties ought to be abolished, or at least substantially reduced because they have large distortionary effects on behaviour.</p>
<p>It is inevitable the tax rate anomalies and differential treatment will arise in the income tax system. There are many present already (e.g. generous capital gains tax concessions for gains made by small business taxpayers, near zero tax on long-term savings through superannuation, zero tax on savings held through the family home). </p>
<p>And fiscal difficulties aside, we can expect more and more tailoring of tax rules, and finessing of the tax system, to cater for the efficiency of an impost.</p>
<p>Of course, it is hard to predict or measure the behavioural effect of certain taxes or tax rates with a high degree of certainty. There are so many factors at play around investment choices, work choices, and spending choices that to isolate the tax rules, and claim a certain response from those rules is not plausible. </p>
<p>Those pushing their self-interest (usually packaged as the public interest) know this, and their solution is to fill the information gap with logic. For example, we have all heard the claim that if we lower the tax rate on salary income, people will respond by working harder or more hours or they will pursue education to get the higher paying job.</p>
<p>Governments and politicians cannot fully implement the efficiency principle. For example, levying very high taxes on the “necessities” of life would not mean a significant reduction in consumption of necessities and therefore this would be an efficient tax measure. </p>
<p>But such a tax measure would rank very low in terms of fairness, and central to the notion of fairness is the idea that a buck is a buck. And fairness is at the top of many peoples’ list when it comes to the design of a tax.</p><img src="https://counter.theconversation.com/content/10886/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dale Boccabella does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>In his 2012 State of the Union address US President Barack Obama lamented the fact that billionaire Warren Buffett faces a lower tax rate on his income than his secretary. The situation arises because…Dale Boccabella, Associate Professor of Taxation Law, Australian School of Business, UNSWLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/111282012-12-05T19:46:01Z2012-12-05T19:46:01ZObama's fiscal 'grand bargain' is a great betrayal of America's most vulnerable <figure><img src="https://images.theconversation.com/files/18331/original/q4yqhmy4-1354665114.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=496&amp;fit=clip" /><figcaption><span class="caption">President Obama&#39;s deficit reduction plan is likely to take a razor to the US social safety net.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>Fiscal cliff. Grand bargain. Shared sacrifice.</p>
<p>The buzzwords on Capitol Hill this December tell a dramatic story. The United States, hurtling toward an unavoidable economic disaster, can be saved only if Republicans and Democrats join hands to bring balanced austerity to the American people.</p>
<p>As Vice President Joe Biden <a href="http://www.politico.com/news/stories/1012/82312.html">would say</a>: what a bunch of malarkey.</p>
<p>The fiscal cliff is a wholly unnecessary – and easily avoided – crisis. The grand bargain aims to fix deficits when unemployment, low consumer demand, and sluggish growth are America’s <a href="http://www.thenation.com/article/171266/grand-bargain-fiscal-cliff-could-be-grand-betrayal">most pressing</a> economic problems.</p>
<p>And that shared sacrifice? It falls almost entirely on economically vulnerable Americans: women, the poor, the aged, and the ailing middle class. In exchange for cutting programs for these groups, the wealthiest 2% of Americans (households earning more than $250,000 a year) would see their taxes return to Clinton-era levels. That is, the top marginal rate would rise from 35% to 39%.</p>
<p>It’s a bargain — a grand one indeed — if you’re a top-income earner. Since the recovery began in early 2009, business has been booming for the top 5%. And the closer you are to the top, the faster your income has grown. Since the recovery began the top 1% of Americans have <a href="http://www.bloomberg.com/news/2012-10-02/top-1-got-93-of-income-growth-as-rich-poor-gap-widened.html">captured</a> 93% of income growth.</p>
<p>For everyone else: stagnation. In the past five years, the median household income in the United States <a href="http://www.nytimes.com/2012/09/13/us/us-incomes-dropped-last-year-census-bureau-says.html">fell</a> to $50,054 from $55,198, continuing to tumble even during the first few years of the recovery.</p>
<p>The grand bargain threatens to make the situation worse. A columnist for the New York Observer <a href="http://observer.com/2012/11/whose-sacrifice-is-it-anyway-the-so-called-grand-bargain-would-fleece-the-middle-class/">called</a> it “a prescription for hunting down every last remaining vestige of the middle class in this country and beating it to death with a stick.”</p>
<p>Strong language, but apt. Because when it comes to “shared sacrifice”, some groups sacrifice far more than others. Women, for example, will be <a href="http://www.theatlantic.com/sexes/archive/2012/11/how-women-could-lose-in-a-grand-bargain/265746/">hit hard</a> by cuts to Medicare (health insurance for the aged) and non-defence discretionary spending. Because they live longer and earn less than men, women make up a greater proportion of Medicare recipients and have fewer resources to pay out-of-pocket for care.</p>
<p>Likewise, because they make up the majority of Americans living in poverty, women will be <a href="http://parenting.blogs.nytimes.com/2012/12/02/poor-women-and-children-faced-with-fiscal-threat/">hobbled</a> by cuts to non-defence discretionary spending. Labelling this part of the budget “discretionary” makes these programs sound frivolous, but for millions of Americans they are <a href="http://dyn.politico.com/printstory.cfm?uuid=9AFE84B9-2E48-46BE-8034-33B65E8824C3">a vital defence</a> against hunger, homelessness, and unemployment. Low-income housing assistance, nutrition assistance, job training, education, disaster assistance, home heating assistance – all come from the non-defence discretionary spending budget.</p>
<p>Moreover, this budget has long been a favourite target for politicians looking to make cuts without touching popular programs like Social Security and defence. In 1996, welfare reform <a href="http://www.cbpp.org/cms/index.cfm?fa=view&amp;id=3700">gutted</a> Aid to Families with Dependent Children, a vital program for children living in poverty. Prior to the reforms, 68% of families living in poverty received aid through the program. In 2010, the program reached only 27%.</p>
<p>In the first round of trillion-dollar cuts during 2011’s debt-ceiling crisis, President Obama <a href="http://www.whitehouse.gov/fact-sheet-victory-bipartisan-compromise-economy-american-people">boasted</a> that the agreement he reached with Congress would “reduce non-defence discretionary spending to its lowest level since Dwight Eisenhower was President” in the 1950s.</p>
<p>Therein lies the problem. Like President Clinton before him, Obama touts cuts to the already tattered social safety net as a positive development. True, he has angled to save programs for the poorest Americans and has laid the foundation for broader health coverage. But in promoting the grand bargain, he demonstrates a willingness to sacrifice the social compact in order to solve the wrong problem.</p>
<p>Deficits simply aren’t the most pressing issue in America. Indeed, given the weak recovery, austerity measures would likely create a drag on the economy by suppressing consumer demand. Without unemployment benefits or food stamps or home-heating assistance, many Americans simply won’t be able to participate in the broader economy.</p>
<p>Yet this is not just an economic issue; it’s an ethical one. At a time when income inequality in America is at a <a href="http://www.nytimes.com/2012/10/17/business/economy/income-inequality-may-take-toll-on-growth.html?">70-year high</a>, when the poor and the middle class are losing ground, when 46.2 million Americans <a href="http://www.businessweek.com/articles/2012-09-12/record-u-dot-s-dot-poverty-rate-holds-as-inequality-grows">live below</a> the poverty line, the grand bargain would force millions of Americans to choose between a heated house and a hot meal, between education and medication. Sacrifice, yes. But shared? Not remotely.</p>
<p>In his victory speech last month, Barack Obama <a href="http://politicalticker.blogs.cnn.com/2012/11/07/transcript-obamas-victory-speech/">declared</a> that America’s greatness came from “the belief that while each of us will pursue our own individual dreams, we are an American family and we rise or fall together as one nation and as one people”. Such a belief only holds true if Americans refuse to exchange their social compact for the mess of pottage that is the “grand bargain”.</p><img src="https://counter.theconversation.com/content/11128/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Nicole Hemmer does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Fiscal cliff. Grand bargain. Shared sacrifice. The buzzwords on Capitol Hill this December tell a dramatic story. The United States, hurtling toward an unavoidable economic disaster, can be saved only…Nicole Hemmer, Visiting Assistant Professor at University of Miami & Research Associate, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/106332012-11-14T19:34:44Z2012-11-14T19:34:44ZNo clear resolution for the US fiscal cliff<figure><img src="https://images.theconversation.com/files/17624/original/cvrh5h56-1352871041.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=496&amp;fit=clip" /><figcaption><span class="caption">Resolving the US&#39; fiscal cliff through taxation reform will prove challenging for the President.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>When President Obama took office in 2008, there was little time for rest or reflection. The economy was in freefall and immediate action was required. This time around, the situation is not so dire. But once again, the President faces a pressing post-election economic challenge: the January 1 deadline known as the fiscal cliff.</p>
<p>So, a quick recap on how we got here: during the lame duck session of Congress in late 2010, Democrats and Republicans agreed to extend the <a href="http://en.wikipedia.org/wiki/Bush_tax_cuts">Bush tax cuts</a> and and institute a payroll tax holiday, both set to expire at the end of 2012. </p>
<p>Then, last summer, as part of a deal to raise the debt ceiling, President Obama agreed to $1 trillion in spending cuts that would begin to be implemented on 1 January 2013. Half of the cuts would be to military spending and the other half to discretionary spending. Neither side is eager to see this “sequestration” go into effect, but the goal was to create an incentive for Democrats and Republicans to reach a comprehensive budget deal. On top of all this, the new year brings the expiration of certain exemptions for the little discussed <a href="http://en.wikipedia.org/wiki/Alternative_Minimum_Tax#.22Patches.22_to_tax_rates_and_exemptions">alternative minimum tax</a>.</p>
<p>These tax hikes and spending cuts would save the government about $500 billion in 2013. But according to the Congressional Budget Office, this enormous anti-stimulus <a href="http://www.theatlantic.com/business/archive/2012/11/the-fiscal-cliff-explainer-what-it-is-where-its-from-who-will-pay-and-why-it-matters/264990/">would push the US back into a recession within the first six month of the year</a>.</p>
<p>While both sides have expressed understandable concern about the long-term budget deficit, it’s these extreme and immediate deficit reduction measures that are most worrying right now. Suzy Khimm of the Washington Post made the point well in declaring that what we have is not a deficit crisis but an <a href="http://www.washingtonpost.com/blogs/wonkblog/wp/2012/11/09/the-fiscal-cliff-is-an-austerity-crisis/">austerity crisis</a>.</p>
<p>At the same time, the term “fiscal cliff” misleadingly implies a point of no return. Tax hikes and spending cuts would have an immediate effect on the markets and create an economic drag not long after. But, because all these policies are spaced out over the course of the year, the impact would probably not be overly damaging assuming a deal was reached reasonably quickly.</p>
<p>The major point of disagreement between the two parties is over taxes. And fairly specific details of tax policy at that. </p>
<p>Both sides want to preserve the alternative minimum tax exemptions while letting the payroll tax cuts expire. But they’re divided over the Bush tax cuts. Republicans want to maintain the current rates for everyone while Democrats want to return to the pre-Bush rates for all income over $250,000.</p>
<p>Democrats believe they have the upper hand in negotiations. Polls show that a majority of Americans support letting the high income Bush tax cuts expire. And President Obama is just coming off a re-election in which he made this a central issue of his campaign. </p>
<p>Further, if America goes off the fiscal cliff and taxes go up for everyone, then Democrats will argue that Republicans are holding the middle-class hostage in order to protect the top 2%.</p>
<p>But their advantage might not be so cut and dried. If it gets to be early to mid January and no deal is in sight the public could become more concerned with averting a rescission than the exact parameters of the deal. Negotiations could turn into a game of fiscal chicken in which each side hopes the other will blink first.</p>
<p>Republican leadership could also try to gain the upper hand by making a tactical shift on taxes. For instance, propose more modest revenue enhancing measures, such as ending some deductions. The GOP could claim that they were the ones willing to compromise, and then try and pressure Obama into taking a deal much less favourable than the one Democrats are after.</p>
<p>The fiscal cliff negotiations are compelling because they bring together so many of the debates that have been at the forefront of American politics in recent years; job creation, deficit reduction, and economic fairness. </p>
<p>And the ultimate resolution is still so unclear. We could end up with a grand bargain over taxes and government spending. The Democrats using their leverage to force the expiration of the Bush era rates. Or even the two parties simply agreeing to just extend everything, postpone the cuts, and then try again next year. </p><img src="https://counter.theconversation.com/content/10633/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Luke Freedman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>When President Obama took office in 2008, there was little time for rest or reflection. The economy was in freefall and immediate action was required. This time around, the situation is not so dire. But…Luke Freedman, US Election Analyst, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/95512012-09-18T20:47:35Z2012-09-18T20:47:35ZIs the US set to jump off a fiscal cliff? <figure><img src="https://images.theconversation.com/files/15577/original/98z2k7y7-1347863092.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=496&amp;fit=clip" /><figcaption><span class="caption">Without serious, structural fiscal reforms — which require bipartisanship and compromise — the US economy could go into free fall.</span> <span class="attribution"><span class="source">Bungee jump image from www.shutterstock.com</span></span></figcaption></figure><p>As we check our political calendars, many look to <a href="http://www.usa.gov/Citizen/Topics/Voting.shtml">November 6</a> as the crucial date that will determine the future direction for US politics and the nation’s ailing economy.</p>
<p>But in policy terms, it is January 2nd, 2013 that arguably matters more. That is the day of reckoning for federal government spending in the United States. During last year’s <a href="http://www.bloomberg.com/news/2011-08-01/obama-debt-cap-deal-with-congress-leaders-avoids-default-vote-due-today.html">dramatic Congressional showdown over raising America’s debt ceiling</a> (to honour payments to foreign creditors), it was agreed by a petulant congress that automatic cuts would occur on January 2, 2013. This is also when the so-called Bush tax cuts of 2001 will expire.</p>
<p>This date is dubbed the “fiscal cliff” because of the dramatic changes to the government’s revenue and expenditure that will be brought about by the automatic changes set to take place that day: over $400 billion worth of tax cuts will expire at the same time as about $100 billion of spending decreases are implemented. Many predict that this will likely send the economy into a double-dip recession. </p>
<p>The Congressional Budget Office estimates <a href="http://www.cbo.gov/publication/43262">a drop in the deficit by about $560 billion</a> between the 2012 and 2013 fiscal years, but the short-term effect is a dampening of economic growth and increased unemployment in an already sputtering economy.</p>
<p>Most analysts and elected officials agree that something must be done by Congress to avoid the automatic changes it set in motion last year as a political dare to inaction.
The opening positions are that the Republicans want all the Bush-era tax cuts to be extended, while Democrats argue that long-term spending cuts should also be offset by tax increases <a href="http://nymag.com/daily/intel/2012/07/obama-tax-cuts-250000-bush.html">for those earning over $250,000 a year</a>. </p>
<p>The problem is that the system requires bipartisanship and compromise. However, because power is currently shared by a Republican House and Democratic Senate — and ill will is running high – compromise will be particularly hard to achieve. Furthermore, any bill without widespread partisan approval will be blocked in the Senate by the threat of the filibuster; if it passes that hurdle it could still be vetoed by the president. </p>
<p>The current thinking is that there are three possible scenarios for the coming months. The Obama administration could cross their fingers and hope that Congress can reach a deal. The second option is that Obama could go bold and head straight for the cliff. He could declare that if Congress is unable to strike a deal on fiscal reform, he will allow the “double fiscal time bombs” to explode. The hope is that this will cause Republicans to abandon their commitment not to raise taxes and force them to the negotiating table. The problem is this will take the iron will of LBJ or FDR. Many wonder whether a president who ran in 2008 on a promise of compromise has such grit in him. </p>
<p>Alternatively, Washington could do nothing — close their eyes and jump off the fiscal cliff. Despite the short-term consequences, <a href="http://www.theatlantic.com/business/archive/2012/08/the-case-for-jumping-off-the-fiscal-cliff-even-if-we-fall-into-recession/261555/">commentators</a> are increasingly suggesting that this wouldn’t be such a bad thing. It would allow the debate to “reset”. Taxes would automatically increase in the New Year when the Bush tax cuts expire; if this was allowed to happen then in 2013, lawmakers would be able to enjoy the political benefits of cutting some of the new hikes rather than being blamed for raising taxes. </p>
<p>In the meantime, the uncertainty over what will happen come January is taking its toll today. In July, supply chain management company, UPS - often considered a gauge for future economic performance - downgraded its growth estimates for the rest of the year, partly due to uncertainty over the likely outcome. </p>
<p>Although Congress is ultimately the forum where tax and spending reforms will be decided upon, we are likely to hear more about the fiscal cliff in the coming weeks in the presidential campaign. The Obama campaign is arguing that Romney’s solution to every problem is tax cuts for America’s highest income earners. Obama even had a tax joke in his convention speech: “Feel a cold coming on? Take two tax cuts, roll back some regulations, and call us in the morning!” Romney argued this weekend that “President Obama is passively allowing us to go over a fiscal cliff”. </p>
<p>Insider accounts of the debt crisis such as Bob Woodward’s latest fly-on-the wall book, <a href="http://www.nytimes.com/2012/09/08/books/the-price-of-politics-by-bob-woodward.html?pagewanted=all">The Price of Politics</a>, finds plenty to fault about Obama’s negotiating skills during these very tricky and important debates. However, Romney and Ryan’s solutions to America’s debt problem – which they suggest is like a wildfire sweeping across America – are likely to leave lots of poorer Americans worse off at a time when poverty is already at a two-decade highpoint in America. Watching the fiscal cliff negotiations in the months ahead is thus just as important as watching the Obama and Romney popularity contest. </p><img src="https://counter.theconversation.com/content/9551/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>As we check our political calendars, many look to November 6 as the crucial date that will determine the future direction for US politics and the nation’s ailing economy. But in policy terms, it is January…Brendon O'Connor, Associate Professor in American Politics at the United States Studies Centre, University of SydneyLindsay Gumley, Research Assistant at the US Studies Centre, University of SydneyLicensed as Creative Commons – attribution, no derivatives.